The New Math of “Objective” RAND: “Over Half” Is Less Than “A Tiny Fraction”

There is much contention in the CUT FATT filings as to how much royalties are claimed on the US and other DTV systems, and what significance the differences may have in the framework of “RAND” (Reasonable and Nondiscriminatory) standards policies and government oversight.

The debated amount for royalties on the US DTV system is $23 dollars, with some debated lower amount for other systems (actually, many components are available royalty-free, see here, for example about how Japan courted Brazil to the ISDB system: “A memorandum on the digital standard signed earlier this year between the Brazil and Japan called for Japanese firms to train local staff and allow Brazilian companies to use the technology without paying royalties”).

So hold this thought: $23 dollars as the contented royalties per set top for the US DTV system versus a Japanese government official’s assertion last month that ISDB set tops would be available for $30 in the Philippines.

Some context. The advent of modern patent pools after a century of policy skepticism is often traced to the 1997 US Department of Justice business review letter that indicated the DOJ would not prosecute on Antitrust grounds a pool license for the MPEG-2 video codec and associated transport stream.

In subsequent years, selective readings of terms of that 1997 letter have become common sport in patent pooling circles. Can a contractor paid to determine essentiality of a patent really be independent from their employer? No increase of royalties by more than 25%, “most-favored-nation” clause for licensees? Does making the list of patents available require posting the list to a web site? What about the potential for hold-up after a standard becomes popular?

Now a particularly interesting assertion is made in the filing by Mitsubishi Electric (emphasis added):

“patent policies cannot become retroactively anticompetitive because of changes in market conditions, such as the prices charged by comparable technology standards.”
…
Department of Justice takes the position that the patent policies of a standards development organization (“SDO”) are to be analyzed ex ante for potential anticompetitive effects.
…
In other words, the DOJ’s antitrust analysis focuses on the state of the world when the SDO’s patent policies are established.

To paraphrase, it appears that Mitsubishi Electric reasons something like that patent pools can charge whatever they think is fair, because there is no objective way to determine what is unfair. What an interesting interpretation of the policy underpinnings of the Department of Justice authorization of ex ante procedures in standards organizations, and one that RAND-based organizations will want to take a note of.

What a far distance this is from the original DOJ business review letter authorizing the MPEG patent pool in 1997 on specific, narrow terms, which contemplated that because royalty rates would be “a tiny fraction” of product prices, collusion or downstream price coordination was highly unlikely:

“Further, since the contemplated royalty rates are likely to constitute a tiny fraction of MPEG-2 products’ prices, at least in the near term, it appears highly unlikely that the royalty rate could be used during that period as a device to coordinate the prices of downstream products. “

So there you have it: in just 12 years from a proscriptive assumption of royalties being a “tiny fraction” to assure no downstream collusion to a claim of “cannot become retroactively anticompetitive” even if royalties are over fifty percent of total product price. Attorneys for Moore’s law should take note.

References

“Even if one were to assume the accuracy of this unsubstantiated report and the unstated methodology underlying it….[t]his falls far short of showing a systemic breakdown in licensing essential DTV patents…there are legitimate reasons for differences in royalty rates between U.S. and foreign pools” (Philips / Qualcomm)

“For purposes of these Comments, it can be assumed that the royalty rates alleged in the petition are accurate. However, it is noted that the petition errantly describes the royalty for ISDB as 100 yen per unit, even though the actual royalty for ISDB is 200 yen per unit. See <http://www.uldage.com/en/indexe.html>. ” (Mitsubishi Electric)

“misleading at best … categorically false … not credible …differences in the patent acquisition and enforcement systems around the world and the fact that the ATSC standard is different from those used for DTV elsewhere in the world … “NAFTA Digital Television” patent license … very reasonable royalty terms” (Thomson)

One thought on “The New Math of “Objective” RAND: “Over Half” Is Less Than “A Tiny Fraction””

Although they diverge in specifics, the general position of the comments filed by patent holders in response to the CUT FATT petition is that the FCC has no right or power to regulate patent royalty rates. The patent-holding commenters point out, correctly, that the USPTO gives patent holders the exclusive right to their inventions and that the federal courts are charged with adjudicating infringement claims. They also argue that the ATSC itself requires RAND licensing and assert that courts are equipped to enforce the ATSC patent policy. Their message to the FCC: this area is well-regulated by the private marketplace, standards bodies and the courts. ATSC royalty rates are none of the FCC’s business.

The patent holding commenters conveniently mix up several discrete sets of corresponding rights and obligations:

Patent rights: In exchange for disclosing an invention and eventually allowing it to pass into the public domain, inventors get a period of exclusive rights to practice their inventions. Enforcement is with the courts and, in some cases, the International Trade Commission.

Standards organizations: In exchange for making certain voluntary licensing commitments, my patented invention may be included in a published standard, potentially expanding the market for my invention greatly. Enforcement is unclear. The FTC, DOJ and courts are candidates in the hands of resourceful lawyers, but in practice there may be little or no relief. It depends.

The FCC: In exchange for having their patents included in a *mandatory* government standard, the FCC imposed on certain patent holders a specific commitment to license their ATSC-essential patents either free of charge or on reasonable and non-discriminatory terms. Enforcement of this particular “FRAND” obligation is squarely with the FCC. The FCC itself made this very clear when it adopted the ATSC A/53 standard and imposed the FRAND obligation as a condition: “[I]f a future problem is brought to our attention, we will consider it and take appropriate action.” None of the patent holders covered by the order adopting the ATSC A/53 standard challenged FCC authority to impose or enforce the FRAND licensing obligation, although may of them apparently see the world differently now that the FCC has raised an eyebrow.

The CUT FATT petition addresses only the third set of rights and obligations. Beneficiaries of the patent holders’ obligations undertaken in exchange for rights bestowed by the USPTO and the ATSC presumably have venues in which to assert grievances. But that’s not the end of the inquiry, because in this somewhat unusual case, the patent holders were granted a third set of privileges (which has turned out to be by far the most lucrative benefit of all). In exchange, they accepted a third set of obligations imposed and enforced by the FCC. Protests that their exclusive FCC-granted rights came with no incremental FCC-enforceable obligations conflict are hollow.

As Andrew Jackson commented in vetoing the Bank Renewal Bill on July 10, 1832, “Every monopoly and all exclusive privileges are granted at the expense of the public, which ought to receive a fair equivalent.” Holders of patents used in the FCC-mandated standard have two government-granted monopolies, one USPTO-granted monopoly right to their patents, and a second FCC-granted monopoly right to the technology used in all televisions sold in the US. The public is entitled to a fair equivalent in exchange for each of these exclusive rights.